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Why Automated Trading Systems Don’t Work

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Automated trading systems ( often referred to as expert advisers or EA for short ) are a very popular method of trading the forex markets.

These systems are based on normal trading strategies used everyday by traders the world over but with the rules and conditions the trader would usually use to place trades himself coded into a program that trades on its own. The trader using the expert adviser doesn’t actually have to do anything, placing and closing trades is done by the program as is placement of the stop-loss and take profit orders.

More often than not automated trading systems are constructed off of indicator based strategies. Trading methods like candlestick patterns, support and resistance and supply and demand involve too many variables to be able to code into an automated system. There are far too many discretionary elements present in these trading strategies for somebody to turn them into an automated trading system.

For this reason, most, if not all automated trading systems are simply indicator trading methods with the added benefit of no, or very little, user input.

The Lure Of Automated Trading Systems

The lure of automated trading is simple.

People see them as a way to make money from trading without doing anything. They think that by having one all you need to do is sit back and watch the money roll in, almost like your own private ATM.

This is the one of the marketing gimmicks scammers use to lure unsuspecting people into buying automated systems.

The promise of making money without doing anything sounds attractive to most people which is why if you come across a sales page of someone selling an EA they will make unbelievable claims like “90% accuracy on all trades” or “never lose again” none of these claims are true. If someone had a system which could win on every trade within a short time they would be the richest person alive, why would they sell a strategy which can win on every trade ? Doesn’t make sense does it ?

Why They Don’t Work

The main reason expert advisers don’t work in the market is down to their inability to adapt to new market conditions.

The variables which people code into expert adviser trading systems are static, which means when the market changes the adviser’s don’t, the EA will keep placing trades under the old market conditions which more often than not results in losing trades.

Example:

You have created an automated system which is based on trend trading, this makes money when the market is trending, when the market switches from being in a trend, to being in a consolidation, the system begins to lose money as it cannot adapt to the new changes in the market.

In the Hedge Fund Market Wizards Book one of the CEO’s of a hedge fund which specializes in algorithmic trading ( basically what we’re talking about ) is asked whether retail traders have a realistic chance of being able of develop a consistently profitable trading system which can run on its own with no user input.

He goes on to say that his hedge fund spends over 300 million a year developing these systems and that it would be impossible for a retail trader to develop a system that would be able to constantly outperform the markets on its own.

These hedge funds which specialize in algorithmic and quantitative trading don’t hire traders, they hire scientist and mathematicians.

They use these people to figure out small edges in the market which are coded into trading systems that can exploit these edges over and over again, these systems are then monitored by traders to make sure there always doing what there supposed to do.

Why Manual Trading Will Always Be Better

Manual trading, with all the drawbacks that come with it, will always be superior to automated trading.

The human mind can draw knowledge from past experience’s to better take advantage of the current situation whereas a machine cannot, we are able to adapt to whatever new conditions the market may throw at us whereas the expert advisory will fail miserably.

For all the benefits you can gain from automated trading (the lack of any emotional input being the primary one) machines simply cannot beat humans when it comes to trading, the only exception possibly being the algorithmic trading systems people code in banks and hedge funds, because these systems are created by very smart people with resources we will never be able to have access to.

They can find edges in the market that we can’t even see ! But at the same time its important to remember these systems are built by humans. That means the conditions they use to enter and exit trades can be exploited if we recognize where they are operating in the market, a hugely difficult task nonetheless but still it comes back to the point of humans always having the advantage over machines, we can adapt to their presence in the market, whereas they have to be constantly maintained and upgraded to adapt to us.

Summary

Expert advisory trading system will never perform better than a manual trader, do not be fooled by the promises of easy riches used by the scammers selling these systems, there simply trying to depart you from your money and they will succeed if you let them. No matter what anybody tells you automated trading systems will never out perform human traders, the human mind is the most advanced computer on the planet, able to calculate hundreds of different pieces of information every second, no matter how powerful algorithmic trading strategies become they will never come close to the capabilities present in the human mind.

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